Offshoring bond issuance

The first half of 2013 has seen private equity sponsors and corporate borrowers continue to look to global bond and debt capital markets as an alternate source of funding to bank lending for M&A and other projects.

Appetite for this kind of borrowing, together with strong investor demand, has resulted in the availability of attractive financing options.  This has significantly improved the deal-making environment for cross-border M&A activity in 2013.  Commentators expect continued activity in this market well into 2013/14 irrespective of recent indications by US Federal Reserve chairman, Ben Bernanke that the Fed may commence tapering its $85 billion-a-month quantitative easing programme.

Offshore bond issuing vehicles have been used by multi-national corporates and private equity houses for a number of years now as a means of obtaining access to global debt capital markets.  The most common types of debt instruments issued by offshore issuers are high yield and convertible bonds.

Jersey ‘cash box’ company structures have also continued to prove popular in an M&A context. This typically involves PLCs raising money either through a placing of shares, a rights issue or by the issuance of a convertible bond.

There are a handful of key reasons for using a Jersey issuer for this type of high yield issuance which include:

Investor familiarity – large multi-nationals which utilise special purpose issuers have a myriad of market and regulatory requirements to satisfy. Jersey issuers provide both a level of flexibility and familiarity to the corporate bond market investors which sponsors target in pan-US / European offerings.

Simplified listing / regulatory approval process – listing the debt of a Jersey issuer on a non-EU market, such as the Channel Islands Stock Exchange, means that UKLA approval will not be required. Any offering document will not need to comply with EU listing/prospectus directives.

Tax neutrality for Jersey issuer – 0 percent rate of Jersey income tax, no capital gains tax or withholding tax in Jersey and no stamp duty on the issue or transfer of shares.

Jersey has an established legal framework based on English law principles but with a greater degree of flexibility.

Speed of Jersey regulatory authorities in issuing the relevant consents means that even the most demanding timetables can generally be met.

Jersey is a member of the OECD and on its White List of Offshore Finance Centres.

There are several deals which represent the confidence which corporate sponsors have had in utilising offshore bond issuing vehicles for event-driven fund raising. These include: Avis Budget Group’s (Jersey issuer) € 250 million of unsecured 6 percent notes due 2021 in March 2013 for its $500 million cross-border acquisition of Zipcar; Taiwan-based Zhen Ding Technology Holding’s $175 million zero coupon convertible bond issue in June last year; and Consolidated Minerals Limited’s April 2011 issuance of $405 million 8.875 percent senior secured notes due 2016.

There is an established track record of corporates in the US, Europe and Asia successfully using offshore issuers for high yield M&A and other event-driven finance. As a less expensive form of financing, corporate debt issuance offers real opportunities for strategic M&A. 

In reaction to the Fed’s May and June 2013 comments about tapering QE, bond-markets may start pricing in the reduction of QE before tapering begins. However, corporates who are considering funding H2 2013/14 acquisitions and projects by tapping debt markets may wish to consider the recent experience of the British Broadcasting Corporation (BBC). In June 2013, the BBC raised £170 million via a US private placement of medium term debt, offering institutional investors a 2.71 percent coupon. The placement was five times oversubscribed.

With apologies to Ian Fleming, the Fed’s recent comments will, at least in the short to medium term, see debt capital markets both shaken and stirred when it comes to high yield issuance. 

 Paul Burton is a managing associate at Ogier Group, and is based in Jersey.